Transforming Banks

by mike on May 1, 2013

piggy bank
It’s a tough time to be a retail bank right now. Banks are facing an onslaught of a sluggish economy, increased regulation, lower profits, undifferentiated products and lackluster customer demand. The result has been a renewed focus on cost reduction with bank layoffs, branch closings and questioning the very existence of the branch. A recent WSJ article highlighted the state of affairs:

U.S. banks and thrifts shut 2,267 branches in 2012, according to SNL Financial. That put the U.S. bank-branch count at 93,000, according to AlixPartners, the lowest tally since 2007. The firm expects the figure to drop to 80,000 over the next decade, putting the total closer in line with 2000 levels.

Banks are floundering to make up for lost fee income and increasingly can’t support the costs of operating a branch. They are turning to innovative technologies to try and transform the branch. The article goes on to quote PNC’s president:

Each time a PNC customer deposits a check by snapping a picture on a mobile phone, that saves the bank $3.88 per transaction compared with a deposit at a teller window, Mr. Demchak told investors.

So why aren’t banks shutting down all of their branches? It turns out that customers still want a personal touch when it comes to banking. The model highlighted in J.D. Power’s retail banking survey is “not pushing customers out of the branch, but rather providing tools that make it easier to conduct their banking business when and where it is convenient for them.” This hit home during a conversation I had with a bank executive on a recent flight. His bank has over $100B in assets and over a 1K branches. 75% of his new customers still open accounts in branches. His online and mobile offerings are growing rapidly, but mainly for servicing functions such as checking account balances and verifying paid bills. Banks are experimenting with new models to offset the cost challenges including advanced ATMs to replace tellers and sharing locations with retailers such as grocery chains.

So where’s the innovation?

  1. Core Technology: There’s significant technological change happening within banks. SaaS and cloud-driven platforms are bringing new online account opening, mobile banking, personal financial management, bill payment and loan origination products to banks. There are many companies playing in various segments here including Intuit, FIS, Jack Henry, Fiserv, Q2, Yodlee, D+H, and Andera (my firm is a current investor) and SmartyPig. Banks also themselves aren’t sitting idle. RBS is spending $1B to improve their branch experience.
  2. Customer Engagement: Banks have historically horrendous relationships with their customers. New entrants such as Simple, PerkStreet and Moven are vastly improving the customer experience by engaging customers directly online and via mobile devices. They are catering to the next generation, tech-savvy consumer and are what Anthemis calls “digitally native banks“. Technically these companies are not banks — most partner with banks such as Bancorp. Core technology providers such as Andera take a different approach and are arming the banks with tools to improve the customer experience. Targeting customers based on online and mobile activity is another promising area of opportunity.
  3. Unbundling of the Bank: This is the most disruptive category in my view. Andy Weissman has written about this in the past. The idea is that a bank is nothing more than a set of a capabilities and those capabilities don’t need to reside inside a bank. Operating costs and margins can be disrupted by new business models. Companies such as Lending Club, Xoom, Wonga and Zestcash and Dwolla are great examples.
  4. Digital Currencies: Banks and other financial institutions store our money and other valuable goods so why don’t they do the same for digital currencies such as Bitcoin? We are scratching the surface with Bitcoin and it’s safe to say banks, financial institutions and their future equivalents will find a way to participate. Flexcoin is a startup trying to solve this problem.


FinTech Strategic Buyer Landscape

by mike on April 6, 2013

I started my career in technology on Wall Street and now spend the vast majority of my time as a VC investing in FinTech. The sector has a vibrant and broad M&A ecosystem and with inspiration from investment bank Luma Partners, I put together a slide below on FinTech strategic acquirers. The major categories include (1) Payments, (2) Banking and SMB, (3) Wall Street, (4) Data and Wealth Management and (5) Insurance, Lending and Real Estate. The grouping above mainly helped me fit everything onto one slide and there are certainly companies that belong in multiple groups. There are also companies that I must have missed so please send in your feedback and comments. I hope you find it useful.

Update: I posted a new graphic below with better formatting, a few recent acquisitions and missing companies.


Value Add Doesn’t Generate Outsized Returns

March 26, 2013

Andy Rachleff was recently on TWiST. If you haven’t seen the episode it’s a must. Andy was a long time VC for 25 years and a founder of Benchmark Capital. He made an interesting comment (about 20 minutes in) on what makes a great VC today. His assertion was that 90% of the value add [...]

Read the full article →

Funding Introverts

March 13, 2013

I’m an introvert or at least what Quiet author Susan Cain refers to as an “ambivert” (somewhere in between an introvert and extrovert depending on the situation). I love meeting new people, but prefer small gatherings to larger group settings. I’d rather listen than speak. I cherish quiet time and reading. I suffer from many [...]

Read the full article →

Fast Growers

March 8, 2013

If you ain’t first, you’re last. –Ricky Bobby

VCs have a maniacal focus on growth. We invest in small companies today in hope that our ownership stakes will be worth a lot more in the future. Some of the key drivers to achieving that success and a premium exit include differentiated products/technology, sustainable competitive advantages, an [...]

Read the full article →

10 Years Ago Today

September 11, 2011

10 years ago today an historic event took place that changed most of our lives. As I watch the television coverage, I can’t help but think about where I was that day. I was a wide-eyed, recent college graduate and had started my first real job in technology at one of the investment banks a [...]

Read the full article →

Best of Quora : Venture Capital and Startups

January 29, 2011

Quora has been exploding. There’s a ton of valuable content and high quality contributors on the site, but it’s definitely getting harder to find the best threads. On that note, here are some of my favorite threads across venture capital and startups. This is by no means an exhaustive list so feel free to add [...]

Read the full article →

FinTech Roundup : Trading Startups

May 24, 2010

High frequency trading and proprietary trading have received quite a bit of media coverage as of late between the recent unexplained market plunge and of course the mortgage meltdown. Not to mention, there is a cloud of looming regulation over the industry. The senate passed a bill on Thursday that among other things aims to [...]

Read the full article →

Introducing FinTech Roundup

May 11, 2010

I’m starting a new weekly series called FinTech Roundup that will be dedicated to discussing technology startups in and around Financial Services. The series will highlight recent investments, M&A and trends across Payments, Capital Markets (Trading, Securities, etc), Banking and other related sectors such as Real Estate and Insurance. Okay, let’s get to it.
Payments is [...]

Read the full article →

Reinventing Financial Services

April 12, 2010

This past weekend Fred Wilson wrote a timely post on VC and systemic risk. Aside from the topic, one comment particularly struck an accord with me. He said:
I believe entrepreneurs will use technology to reinvent the way financial services are provided to consumers this decade.
I agree and here’s why. First, if anything, the crisis has [...]

Read the full article →